Australia 'May Keep Powers to Restrict LNG Exports After 2023'

With east coast gas supply situation expected to remain precariously balanced for foreseeable future, some sort of policy that gives powers to the Australian federal government to restrict gas exports in order to ensure adequate domestic supply may continue even after the Australian Domestic Gas Security Mechanism (ADGSM) ceases in 2023, Wood Mackenzie said in a note September 12.

The ADGSM was introduced by the federal government July 1, 2017, amid gas shortages on Australia's east coast markets. It gives the federal government power to restrict gas exports to ensure there is adequate gas supply to meet domestic demand until January 1 2023. The federal government has yet to exercise this power. Australian Labor Party, which is in opposition at present, recently said it will put in tighter controls on LNG exports to rein in rising domestic gas prices and ease supply shortage if it wins the elections. The party said that, if elected, it will strengthen the ADGSM.

“The Queensland LNG export projects have shattered the east coast’s ‘cheap gas forever’ mentality,” comments Nicholas Browne, director of gas and LNG research at global commodity consultancy WoodMac:  “We believe Australia’s domestic gas price is now inextricably linked to the global LNG price.”

“The Australian government has already indicated its unease with gas being purchased for export in competition with domestic market buyers. However, this competition between domestic buyers and the Asian markets for available gas is likely to continue,” Browne said.

With mature conventional fields in Victoria, New South Wales and South Australia declining, Browne said extra gas will need to be diverted from LNG into the southern domestic markets from as early as 2025. Diversions could even be earlier than this to meet winter demand, he said.

“The third-party gas purchased by Queensland’s LNG projects looks to be the most at risk of diversion and, as such, the LNG projects are likely to come under pressure to reduce these purchases,” Browne added: “The ongoing call on Queensland gas for both export and the domestic market will keep the supply-demand balance in a precariously tight but supplied position through to 2028.”

“Based on our supply forecast, from 2028 there is not enough gas to meet both LNG contracts and demand. More gas will need to be developed and commercialised, or LNG imported, to meet the needs of both the domestic market and to fulfil LNG contracts,” he said.

Infrastructural issues may also pose a challenge. According to Browne, pipeline bottlenecks during winter will start to constrain the physical delivery of Queensland gas into the southern states from 2026. “Unless additional pipeline capacity becomes available, LNG imports will be the only physical and commercial alternative to ensure security of supply, at least in winter,” Browne said.

This shift in the east coast gas market will also see pricing mechanisms change. WoodMac expects Asian LNG netback pricing will form the basis of east Australian domestic gas prices, with Queensland emerging as the market’s marginal supply option.

“The reported price range for new gas contracts in Victoria, New South Wales and South Australia in 2019 is in the A$8.50-$11 per gigajoule (US$6.05-$7.82/GJ) range,” Browne said: “We expect a price range will be maintained through our forecast due to different end markets, cost structures and differing interpretations and expectations of LNG netback pricing.

“While LNG spot prices may soften over the next three years, US$70-80/b oil prices would keep LNG netbacks high and sustain contract prices at between A$8.50 and A$11.50/GJ.”

However the Asian LNG market is expected to tighten from 2021, which could see domestic contract prices nudge up to between A$10.70 and A$12.70/GJ by 2025, WoodMac forecast. 

“From 2026, with more expensive gas from Queensland setting the marginal price and limited pipeline capacity to enable flows south, prices would rise further and LNG imports become economic, and effectively set a ceiling for gas prices in the winter,” Browne added.

By 2030, in the absence of additional pipeline infrastructure, LNG could feasibly be imported in larger quantities and set the floor of the domestic price in the southern states. Without further upstream developments and reduced upstream costs, prices could reach between A$14.30 and A$15.90/GJ by 2030 and continue to grow after that, depending on international oil prices.